DUBAI (Reuters) — A strike by thousands of migrant workers at Dubai's biggest builder Arabtec last month may be a harbinger of a new wave of industrial activism that threatens to disrupt the Gulf's latest construction boom.

Gulf nations have relied heavily on the supply of cheap labour from Asia to build their vast housing and infrastructure needs. But their treatment of foreign workers has been criticized repeatedly by rights groups who have demanded that governments repeal oppressive labour laws.

"Any Gulf government that seeks to significantly reform its labour system will face tremendous opposition from its national (employers) who benefit greatly from legal and regulatory shortcomings," said Nicholas McGeehan, researcher for Qatar, the UAE and Bahrain at Human Rights Watch, a U.S-based non-governmental research and rights advocacy group.

"This problem is eminently fixable, but as yet no Gulf states have shown the necessary political will and the exploitation of migrant workers is as bad as ever," he said.

Most blue collar workers in the Gulf Arab states are migrant labourers hired on a contract basis from South Asian countries such as India, Pakistan, Bangladesh and Nepal, who have come to the Middle East to escape abject poverty in their home country.

Typically employed on low wages, workers are usually housed in camps with basic facilities on the outskirts of cities. They are tied to a Kafala or sponsorship-based employment system which binds them to one employer, and the workers pay heavy recruitment fees to agents, leaving many in debt even before they start work.

The lack of workers' rights coupled with low wage growth are now starting to make the Gulf less attractive to workers from South Asia and elsewhere. That is adding to a labour shortage that could jeopardize Gulf states' ambitions to host world events, including Dubai's bid to host the World Expo in 2020, which governments consider vital to their ambitions to be seen as global cities.

Qatar's preparations to host the soccer World Cup in 2022 are throwing the spotlight on working conditions there. At the FIFA Congress in the Maldives on Saturday, representatives from the International Trade Union Confederation staged a demonstration criticizing the lack of worker rights in Qatar and calling for a rerun of the World Cup bidding process.

Strikes by foreign workers are illegal across the Gulf although protests are more common in Kuwait among public sector workers. Last month more than 1,000 workers at the state-run Oil Sector Services went on strike demanding better pay.

At Arabtec in Dubai last month the workers downed tools illegally to call for a wage hike of around $50 a month but their demand was eventually refused. About 200 who went on strike left the state after the stoppage of their own accord, police officials said last week. Local media reports, however, said more than 400 workers returned to their home countries.

No wage growth

Wage demands are starting to echo a previous building boom in the Gulf in 2006-07 before the global financial crisis and Dubai's property market collapse.

Hundreds of thousands of construction workers protested in Dubai in 2006-07, sometimes violently, against living conditions and delayed wage payments. The unrest spurred a wave of labour reforms in the UAE, including a wage protection system to ensure salaries are paid on time and the introduction of a three-hour work break during peak summer months.

However, the government ignored calls for minimum wage laws and workers' salaries remained largely unchanged. The sponsorship system also continued and there has been no move to legalise unions.

In 2011, more than 130 artists said they would boycott a branch of New York's Guggenheim museum in Abu Dhabi, which is being built on Saadiyat Island, due to what they said was exploitation of foreign workers. Arabtec is building a branch of Paris's Louvre museum on the island.

Despite the global attention unrest is often suppressed.

Gulf authorities are even more wary of protests after the Arab Spring, which toppled rulers in Egypt, Tunisia, Libya and Yemen and threatened many others.

The oil-rich nations of the Gulf have been appeasing their citizens by doling out free housing, employment and even waiving loans.

The disparity in wages between local citizens and migrant workers is widening.

Mohammed Jindran, managing director of Overseas Labour Supply, a recruitment firm in the UAE, which has about 4 million migrant workers, says unskilled workers in the UAE earn on average around 750 dirhams (US$200) a month, the same rate as six years ago. Skilled workers' wages are above 900 dirhams.

"Companies have not increased wages. We are feeling the bite while recruiting... no workers are willing to come to the Gulf on the salaries offered here," said Jindran.

Any increase in wages would mean an increase in project costs that have already been budgeted for and crimp profits.

Dubai will need workers for construction projects if it wins the right to host the World Expo 2020, which is the centrepiece of many of its future development plans. The host will be selected in November. The event would draw millions more tourists and, crucially, give Dubai more international prestige.

Rapid growth of Asian economies, however, means workers can now get almost double wage rates on offer in the Gulf back home. Workers from India used to be the biggest group among migrant workers in the Gulf but are now in decline due to better opportunities at home, forcing Gulf employers to look more to other parts of South Asia and to Africa for labourers.

"Companies will have to go back to the drawing board and rethink pricing if they want workers for these projects," said Jindran.

Qatar is rushing to build world class facilities in preparation for hosting the World Cup. Last week it awarded contracts worth US$5.4 billion to build a metro system in the capital Doha and is awarding contracts to build stadiums for the soccer tournament.

"The increased real estate activity being witnessed in Dubai in conjunction with World Cup-associated work and infrastructure works in Qatar will put pressure on labour in addition to other things such as supply of materials," said Duncan Gray, director at consultancy Colliers International-Middle East.

Saudi Arabia, the biggest economy in the Gulf, also has projects worth $790 billion in progress or planned. The kingdom is currently pursuing sweeping labour reforms that aim to tackle domestic unemployment by pushing firms to hire Saudi nationals.

A crackdown on illegal employment of foreigners in the country has seen thousands of migrant workers return home, throwing a challenge to the government as it seeks to build to overcome a shortage of 500,000 homes and to meet vast infrastructure needs.